Canada’s economy heated up heading into 2025 — now comes Trump

A person carries shopping bags along a street in Montreal, Saturday, December 14, 2024. THE CANADIAN PRESS/Graham Hughes

OTTAWA — Canada’s economy was heating up heading into 2025, but the return of U.S. President Donald Trump to the White House threatens to snuff out those burgeoning flames.

Statistics Canada reported Friday that real gross domestic product rose 2.6 per cent on an annualized basis in the fourth quarter. That’s well above calls from the consensus of economists polled by Reuters ahead of the release, as well as the Bank of Canada, both of which expected real GDP to rise 1.8 per cent annualized.

The agency said household spending in the quarter rose at its fastest pace in more than two years. The surge was driven by purchases of new trucks, vans and sport utility vehicles.

TD Bank director of economics James Orlando said in an interview that interest rate cuts from the Bank of Canada through 2024 gave a boost to consumer confidence heading into the end of the year.

Cheaper borrowing costs helped convince consumers they could afford a new auto loan or their mortgage renewal wouldn’t bite as hard, spurring some to loosen their purse strings.

“You go to shopping malls, you go to auto dealerships, you go to restaurants and they’re full,” Orlando said.

“Canadians are roaring back right now and they’re out spending. So that’s what’s spawning this rise in GDP.”

StatCan said real GDP rose 0.2 per cent in December and its early estimate calls for growth to slightly accelerate to 0.3 per cent in January.

Retail activity was particularly strong in the final month of the year. StatCan said December’s 2.6 per cent growth in retail trade was the biggest jump since June 2021, when in-person shopping restrictions tied to the COVID-19 pandemic began to loosen.

Despite disruptions from the Canada Post strike, the transportation sector bumped higher in December, thanks to a surge in business for couriers and the end of rail and port strikes in November leading to a rebound in growth.

Friday’s release also showed the Canadian economy grew 2.2 per cent annualized in the third quarter of 2024, revised up from initial estimates for one per cent growth.

But all of this momentum was before Trump returned to office and began his threats to impose tariffs on Canada.

“Canada’s economy showed some evident sparks of life in the final quarter of 2024 as it responded to lower interest rates and a sales tax holiday, but that flame could still be extinguished in 2025 if the country faces a tariff wall,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note to clients.

He said capital spending will likely be restrained in the first quarter because of the uncertainty and a trade war with broad and significant tariffs could “easily snuff out growth.”

“That risk could dull market reactions to what was otherwise a better than expected report, and will have the central bank still mulling over a March rate cut if the tariff news goes the wrong way,” he said.

With signs of inflation reheating and the economy accelerating, Orlando said that would be enough in ordinary circumstances for the Bank of Canada to pause interest rate cuts at its next meeting on March 12.

But with the economy “staring down the barrel of tariffs,” he said another quarter-point cut to bring the benchmark rate down to 2.75 per cent is warranted as “insurance.”

Financial markets have the odds of a seventh consecutive interest rate cut versus a hold in March roughly split after Friday’s GDP release, according to LSEG Data & Analytics.

Residential construction also rose at its fastest rate in more than three years in the fourth quarter, Statistics Canada said, while drawdowns on business inventories offset growth.

StatCan said real GDP per capita grew 0.2 per cent last quarter. On a per-person basis, the Canadian economy had contracted in five of the last seven quarters, though the agency revised results in the second quarter of 2024 up into positive territory.

Orlando said that the strong fourth-quarter results are still important, even as Trump threatens to upend the Canadian economy.

“I think that matters hugely to figure out, if you’re going to take some punches, how strong are you before you take those?”

---

Craig Lord, The Canadian Press

This report by The Canadian Press was first published Feb. 28, 2025.